Corporate Governance Report

Transcription

1 Corporate Governance Report The purpose of this report is to disclose the corporate governance structure and practices adopted by the Company with a view to complying with the provisions of the Recommendations of the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários CMVM ) on Corporate Governance of Listed Companies as published in September 2007, as well as with the best international corporate governance practices. This report has been drawn up in accordance with articles 7 and 245-A of the Portuguese Securities Code and the form attached to CMVM Regulation no. 1/2010, which regulation is adopted by PT following indication by the CMVM, under Circular issued on Report and consolidated accounts

2 26 January 2010, that the CMVM would prefer that listed company corporate governance reports for the financial year of 2009 be prepared in accordance with such form. CONTENTS CHAPTER 0. CORPORATE GOVERNANCE RULES 6 CORPORATE GOVERNANCE RULES APPLICABLE TO PT 6 STATEMENT OF COMPLIANCE WITH CMVM 2007 RECOMMENDATIONS 7 INTRODUCTION 15 PT STRUCTURE 15 CORPORATE GOVERNANCE 16 CHAPTER I. GENERAL MEETING OF SHAREHOLDERS 18 I.1. IDENTIFICATION OF THE MEMBERS OF THE BOARD OF THE GENERAL MEETING OF SHAREHOLDERS 18 I.2. MEMBERS OF THE BOARD OF THE GENERAL MEETING OF SHAREHOLDERS COMMENCEMENT AND EXPIRATION OF TERMS OF OFFICE 19 I.3. INDICATION OF THE REMUNERATION OF THE CHAIRMAN OF THE BOARD OF THE GENERAL MEETING OF SHAREHOLDERS 19 I.4. INDICATION OF BLOCKING PERIOD REQUIRED FOR PARTICIPATION IN THE GENERAL MEETING OF SHAREHOLDERS 19 I.5. INDICATION OF RULES APPLICABLE TO SHARE BLOCKING IN THE EVENT OF ADJOURNMENT OF THE GENERAL MEETING OF SHAREHOLDERS 19 I.6. NUMBER OF SHARES CORRESPONDING TO ONE VOTE 19 I.7. LIMITATIONS ON VOTING RIGHT EXERCISE OR VOTE COUNTING 19 I.8. BYLAW RULES ON THE EXERCISE OF VOTING RIGHTS 20 I.9. EXISTENCE OF BYLAW RULES ON THE EXERCISE OF VOTING RIGHTS BY CORRESPONDENCE 20 I.10. MAKING AVAILABLE A FORM FOR THE EXERCISE OF VOTING RIGHTS BY CORRESPONDENCE 20 I.11. REQUIREMENT FOR A PERIOD OF TIME BETWEEN RECEIPT OF THE DECLARATION OF VOTE BY CORRESPONDENCE AND THE DATE OF THE GENERAL MEETING OF SHAREHOLDERS 21 I.12. EXERCICE OF VOTING RIGHTS BY ELECTRONIC MEANS 21 I.13. EXTRACTS FROM MINUTES OF GENERAL MEETINGS OF SHAREHOLDERS 21 I.14. BACKGROUND INFORMATION ON GENERAL MEETINGS OF SHAREHOLDERS 21 I.15. INDICATION OF THE REPRESENTATIVE(S) OF THE COMPENSATION COMMITTEE ATTENDING GENERAL MEETINGS OF SHAREHOLDERS 22 I.16. INTERVENTION OF THE GENERAL MEETING OF SHAREHOLDERS IN THE REMUNERATION AND EVALUATION POLICY 22 I.17. INTERVENTION OF THE GENERAL MEETING OF SHAREHOLDERS IN SHARE ALLOTMENT PLANS FOR MANAGEMENT, SUPERVISION AND OTHER OFFICERS 22 I.18. INTERVENTION OF THE GENERAL MEETING OF SHAREHOLDERS IN A PENSION BENEFIT SYSTEM FOR MANAGEMENT, SUPERVISION AND OTHER OFFICERS 23 I.19. BYLAWS PROVISION REGARDING THE SUBMISSION TO THE GENERAL MEETING OF SHAREHOLDERS, EVERY FIVE YEARS, OF THE RULE OF LIMITATION OF VOTES SUSCEPTIBLE OF HOLDING OR EXERCISE BY A SINGLE SHAREHOLDER 23 I.20. DEFENSIVE MEASURES CAUSING EROSION IN THE COMPANY S ASSETS 23 I.21. SIGNIFICANT AGREEMENTS INCLUDING CHANGE OF CONTROL CLAUSES 23 I.22. AGREEMENTS WITH MEMBERS OF THE BOARD AND OFFICERS PROVIDING FOR COMPENSATION IN THE EVENT OF TERMINATION OF OFFICE FOLLOWING A CHANGE IN CONTROL 24 CHAPTER II. MANAGEMENT AND SUPERVISORY BODIES 25 SECTION I. GENERAL 25 II.1. IDENTIFICATION AND COMPOSITION OF CORPORATE BODIES 25 Board of Directors 25 Executive Committee 26 Audit Committee 26 Report and consolidated accounts

3 Chartered Accountant 27 II.2. IDENTIFICATION AND COMPOSITION OF SPECIALIZED COMMITTEES CREATED WITH POWERS IN MATTERS OF CORPORATE MANAGEMENT OR SUPERVISION 27 Evaluation Committee 27 Corporate Governance Committee 28 Structures Supporting the Executive Committee 28 II.3. DISTRIBUTION OF POWERS AMONG THE VARIOUS CORPORATE BODIES, COMMITTEES AND/OR DEPARTMENTS OF THE COMPANY 29 A. MANAGEMENT BODY 29 Board of Directors 29 Executive Committee 30 Powers of the Chairman of the Board of Directors and Chief Executive Officer 30 Division of functions within the Executive Committee 32 Disclosure obligations of the Executive Committee 32 B. SUPERVISORY BODIES 33 Audit Committee 33 Chartered Accountant 34 C. COMMITTEES AND SUPPORTING STRUCTURES 34 Evaluation Committee 34 Corporate Governance Committee 35 Structures Supporting the Executive Committee 36 II.4. ANNUAL REPORT ON THE ACTIVITY CARRIED OUT BY THE AUDIT COMMITTEE 37 II.5. INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS 38 Financial Reporting Controls 38 II.6. RESPONSIBILITY OF THE MANAGEMENT AND SUPERVISORY BODIES IN THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS 40 II.7. OPERATING RULES OF CORPORATE BODIES 40 Internal regulation and operation of the Board of Directors 40 Operation of the Executive Committee 40 Internal regulation and operation of the Audit Committee 40 Action by the Chartered Accountant 41 Operation of the Evaluation Committee and Corporate Governance Committee 41 Conflicts of interest, maximum number of functions and other incompatibilities 41 SECTION II. MANAGEMENT 42 II.8. WORK COORDINATION MECHANISMS FOR NON-EXECUTIVE MEMBERS 42 II.9. IDENTIFICATION OF THE MAIN ECONOMIC, FINANCIAL AND LEGAL RISKS TO WHICH THE COMPANY IS EXPOSED IN CARRYING OUT ITS BUSINESS 42 II.10. POWERS OF THE MANAGEMENT BODY, NOTABLY AS REGARDS CAPITAL INCREASE RESOLUTIONS 43 II.11. FUNCTION ROTATION POLICY APPOINTMENT AND SUBSTITUTION OF MEMBERS 44 Function rotation policy 44 Rules on the appointment and substitution of the members of the Board of Directors 44 Rules on the appointment and substitution of members of the supervisory bodies 44 II.12. NUMBER OF MEETINGS OF THE MANAGEMENT AND SUPERVISORY BODIES, AS WELL AS REFERENCE TO MINUTES OF SUCH MEETINGS 44 II.13. NUMBER OF MEETINGS OF THE EXECUTIVE COMMITTEE AND REMITTAL OF ITS MINUTES AND NOTICES 45 II.14. EXECUTIVE AND NON-EXECUTIVE MEMBERS INCOMPATIBILITY RULES AND INDEPENDENCE CRITERIA 45 Board of Directors 45 Audit Committee 45 II.15. RULES FOR EVALUATION OF INDEPENDENCE OF MANAGEMENT MEMBERS 46 Board of Directors 46 Audit Committee 46 II.16. SELECTION PROCEDURE FOR NON-EXECUTIVE DIRECTOR CANDIDATES 47 II.17. DESCRIPTION OF THE ACTIVITY OF NON-EXECUTIVE DIRECTORS 48 II.18. PROFESSIONAL QUALIFICATIONS OF THE MEMBERS OF THE BOARD OF DIRECTORS, INDICATION OF PROFESSIONAL ACTIVITIES CARRIED OUT BY THE SAME IN THE LAST FIVE YEARS AT LEAST, NUMBER OF SHARES IN THE COMPANY HELD BY THE SAME, DATE OF FIRST APPOINTMENT AND DATE OF EXPIRATION OF TERM OF OFFICE 48 II.19. FUNCTIONS EXERCISED BY THE MEMBERS OF THE MANAGEMENT BODY IN OTHER COMPANIES, INDIVIDUALIZING THOSE EXERCISED IN OTHER COMPANIES OF THE SAME GROUP 48 Report and consolidated accounts

4 SECTION III. GENERAL AND SUPERVISORY COUNCIL, COMMITTEE FOR FINANCIAL MATTERS, AUDIT COMMITTEE AND FISCAL COUNCIL 48 II.24. EVALUATION OF THE EXTERNAL AUDITOR 48 II.29. COMPANY REMUNERATION POLICY 49 SECTION IV. REMUNERATION 49 Compensation Committee 49 Independence of the members of the Compensation Committee 49 II.30. DESCRIPTION OF THE REMUNERATION POLICY FOR THE MEMBERS OF THE MANAGEMENT AND SUPERVISORY BODIES AS REFERRED TO UNDER ARTICLE 2 OF LAW NO. 28/2009 OF 19 JUNE II.31. REMUNERATION INDIVIDUALLY EARNED BY THE MEMBERS OF THE COMPANY S MANAGEMENT AND SUPERVISORY BODIES 50 II.32. ALIGNMENT WITH LONG TERM INTERESTS OF THE COMPANY, REMUNERATION BASED ON PERFORMANCE AND DISINCENTIVE TO EXCESSIVE RISK TAKING 54 II.33. ON THE REMUNERATION OF EXECUTIVE DIRECTORS: 54 a) Reference to the fact that the remuneration of executive directors incorporates a variable component, and information on the way as such component depends on performance evaluation; 54 b) Indication of the corporate bodies empowered to carry out the performance evaluation of executive directors; 54 c) Indication of pre-determined criteria for the performance evaluation of executive directors; 55 d) Clarification of the relative significance of the variable and fixed components of director remuneration, as well as indication of maximum limits for each component; 55 e) Indication of the deferment of payment of the variable component of the remuneration, mentioning the deferment period; 55 f) Explanation on how the payment of the variable remuneration is subject to continued positive performance by the company all along the deferment period; 55 g) Sufficient information on the criteria on which the allocation of a variable remuneration in shares is based, as well as on executive directors keeping any shares granted them in the company, on any agreement executed as to such shares, notably hedging or risk transfer agreements, the limit thereof, and their relationship to the amount of the overall annual remuneration; 56 h) Sufficient information on the criteria on which the allocation of a variable remuneration in options is based, and indication of deferment period and exercise price; 56 i) Identification of the main parameters of and grounds for any annual prize system and any other non-pecuniary benefits; 56 j) Remuneration paid in the form of profit sharing and/or prize payment, and the reasons why such prizes and/or profit sharing were granted; 56 l) Compensations paid or due to former executive directors in respect of termination of office during the financial year; 56 m) Reference to contractual limitation as established for any compensation to be paid upon removal without just cause of a director, and its relationship with the variable component of the remuneration. 56 n) Amounts paid, for any reason whatsoever, by other companies in a control or group relationship; 57 o) Description of the main characteristics of complementary pension or early retirement systems for directors, specifying whether the same were subject to appraisal by the general meeting of shareholders; 57 p) Estimate of the value of material non-pecuniary benefits deemed as remuneration not covered by the foregoing situations; 57 q) Existence of mechanisms preventing executive directors from executing agreements that might put into question the reason for a variable remuneration. 57 II.34. REFERENCE TO THE FACT THAT THE REMUNERATION OF NON-EXECUTIVE DIRECTORS OF THE MANAGEMENT BODY DOES NOT INCORPORATE VARIABLE COMPONENTS 57 II.35. WHISTLEBLOWING 57 SECTION V. SPECIAL COMMITTEES 58 II.36. PERFORMANCE EVALUATION, GOVERNANCE AND APPOINTMENT COMMITTEES 58 II.37. NUMBER OF MEETINGS OF THE COMMITTEES AND MINUTES OF SUCH MEETINGS 58 II.38. REFERENCE TO THE FACT THAT A MEMBER OF THE REMUNERATION COMMITTEE HAS KNOWLEDGE AND EXPERIENCE IN THE MATTER OF REMUNERATION POLICY 59 II.39. INDEPENDENCE OF THE PERSONS HIRED BY THE REMUNERATION COMMITTEE 59 CHAPTER III. INFORMATION AND AUDITING 60 III.1. CAPITAL STRUCTURE 60 III.2. QUALIFIED HOLDINGS IN THE SHARE CAPITAL IN THE ISSUER, CALCULATED IN ACCORDANCE WITH ARTICLE 20 OF THE PORTUGUESE SECURITIES CODE 61 III.3. IDENTIFICATION OF SHAREHOLDERS WITH SPECIAL RIGHTS AND DESCRIPTION OF SUCH RIGHTS 61 III.4. ANY RESTRICTIONS TO SHARE TRANSFERABILITY, SUCH AS CONSENT CLAUSES FOR DISPOSAL, OR LIMITATIONS TO SHARE OWNERSHIP 62 III.5. SHAREHOLDERS AGREEMENTS OF WHICH THE COMPANY IS AWARE AND MIGHT LEAD TO RESTRICTIONS IN THE TRASFER OF SECURITIES OR VOTING RIGHTS 62 III.6. RULES APPLICABLE TO AMENDMENT TO THE BYLAWS OF THE COMPANY 62 Constitutive quorum for the General Meeting of Shareholders 62 Resolution quorum for the General Meeting of Shareholders 62 Report and consolidated accounts

5 III.7. CONTROL MECHANISMS PLANNED FOR ANY EMPLOYEE CAPITAL HOLDING SYSTEM TO THE EXTENT THAT VOTING RIGHTS ARE NOT EXERCISED BY SUCH EMPLOYEES 62 III.8. DESCRIPTION OF THE ISSUER S SHARE PRICE EVOLUTION 63 III.9. DESCRIPTION OF THE DIVIDEND DISTRIBUTION POLICY ADOPTED BY THE COMPANY 63 Dividend Distribution policy 63 Dividend distributed in the last financial years 64 III.10 MAIN CHARACTERISTICS OF SHARE ALLOTMENT AND SIMILAR PLANS 65 III.11. TRANSACTIONS WITH THE MANAGEMENT AND SUPERVISION OR COMPANIES IN A CONTROL OR GROUP RELATIONSHIP 65 III.12. TRANSACTIONS WITH OWNERS OF A QUALIFIED HOLDING 65 III.13. INTERVENTION OF THE SUPERVISORY BODY IN THE PRIOR EVALUATION OF TRANSACTIONS WITH OWNERS OF A QUALIFIED HOLDING 65 III.14. DESCRIPTION OF STATISTICAL DATA (NUMBER, AVERAGE AND MAXIMUM VALUE) FOR TRANSACTIONS SUBJECT TO PRIOR INTERVENTION BY THE SUPERVISORY BODY 65 III.15. ACTIVITY CARRIED OUT BY THE AUDIT COMMITTEE 66 III.16. REFERENCE TO THE EXISTENCE OF AN INVESTOR SUPPORT OFFICE OR OTHER SIMILAR SERVICE 66 III.17. INDICATION OF THE AMOUNT OF ANNUAL REMUNERATION PAID TO THE AUDITOR AND OTHER INDIVIDUALS OR CORPORATIONS IN THE SAME NETWORK SUPPORTED BY THE COMPANY AND OR BY CORPORATIONS IN A CONTROL OR GROUP RELATIONSHIP, AS WELL AS SPECIFICATION OF THE PERCENTAGE OF EACH TYPE OF SERVICE 67 III.18. REFERENCE TO THE ROTATION PERIOD OF THE EXTERNAL AUDITOR 68 ANEXO I 69 United States rules applicable to PT as a Foreign Private Issuer 69 APPENDIX II 72 Code of Ethics 72 Code of Ethics for Senior Financial Officers 72 Proceedings implemented by PT for compliance with the rules applicable to Officer and Related Party Transactions 73 a) Transactions by Group Officers 73 b) Related Party Transactions 73 Sustainable Development and Social Responsibility Policy 74 APPENDIX III 76 Functions performed by members of the management body in other companies Professional qualifications and professional activities performed during the last 5 years APPENDIX IV 93 Declaration of the Board of Directors on the remuneration applicable to PT Group officers (in the meaning of article 248B-3 of the Portuguese Securities Code) 93 APPENDIX V 94 Statement of the Compensation Committee on the remuneration policy for the members of the management and supervisory bodies of Portugal Telecom, SGPS, S.A. 94 Report and consolidated accounts

6 CHAPTER 0. CORPORATE GOVERNANCE RULES CORPORATE GOVERNANCE RULES APPLICABLE TO PT In this regard, it should be stressed that most CMVM Recommendations on the governance of listed companies published in September 2007 ( CMVM 2007 Recommendations ) 1 are fully adopted by Portugal Telecom, and are reflected on its corporate governance model 2. This model s integrity, transparency and strictness have been reinforced as well by the Company s compliance with the binding rules and best practices applicable to foreign private issuers with securities admitted to trading on the New York Stock Exchange ( NYSE ). In fact, as an issuer of securities admitted to trading on NYSE qualifying as a foreign private issuer, PT is subject to the mandatory rules set forth, notably, in Rule 10A-3 on Listing Standards Relating to Audit Committees issued by the Securities and Exchange Commission ( SEC ) for regulation purposes under Section 10A(m) of the Securities Exchange Act, as amended by the Sarbanes-Oxley Act, and the Final Rules approved by NYSE on corporate governance (Section 303A Corporate Governance Standards), all as described in Appendix I hereto. PT is also subject to other rules adopted at internal level, which are relevant in its corporate governance structure, particularly the Regulations of the Board of Directors and its internal committees, as well as the Audit Committee Regulation. Additionally, PT has approved several conduct and transparency rules, i.e. the Group s Code of Ethics, the Code of Ethics for Senior Financial Officers, the rules on Transactions by Officers and the reviewed rules on Transactions with Related Parties as adopted at the end of the 2009 financial year, as well as a Sustainable Development and Social Responsibility Policy. A short description of all these rules is attached hereto as Appendix II. PT further adopts rules and structures for internal control, risk management and whistleblowing. 1 Available on 2 Notwithstanding the approval by the CMVM, in January 2010, of new Recommendations on Corporate Governance ( CMVM 2010 Recommendations ), such recommendations will be applicable only in respect of the governance report for the financial year ending on 31 December Report and consolidated accounts

7 STATEMENT OF COMPLIANCE WITH CMVM 2007 RECOMMENDATIONS The Company fully adopts the CMVM 2007 Recommendations, except for Recommendations I.3.3 and I.6.2, which are not complied with for the reasons identified hereunder. The Chapters of this Corporate Governance Report that contain a description of the measures taken by the Company for compliance with the abovementioned CMVM 2007 Recommendations are identified hereunder. CMVM RECOMMENDATION COMPLIANCE REPORT I. GENERAL MEETING I.1 Board of the General Meeting of Shareholders I.1.1 I.1.2 The chairman of the board of the general meeting of shareholders shall have human and logistic support resources as appropriate for his needs, taking into account the company s economic position. The remuneration of the chairman of the board of the general meeting of shareholders shall be disclosed on the corporate governance annual report. Yes Chapter I. Yes Chapter I.3 I.2 Participation in the General Meeting of Shareholders I.2.1 I.2.2 Any imposition of a prior deposit or share blocking period for participation in the general shareholders meeting shall not exceed 5 business days. In the event of adjournment of the general meeting of shareholders, the company shall not impose such blocking for the whole period until the session is resumed; the usual advance required for the first session shall be sufficient. Yes Chapter I.4 Yes Chapter I.5 I.3 Voting and exercise of the right to vote I.3.1 I.3.2 I.3.3 Companies shall not provide for any bylaw restriction on voting by correspondence. The bylaw advance period for the receipt of voting declarations issued by correspondence shall not exceed 3 business days. Companies bylaws shall provide that one vote shall correspond to each share. Yes Chapters I.9 & I.10 Yes Chapter I.11 No (1) I.4 Quorum and resolutions I.4.1 Companies shall not establish a constitutive or resolution quorum in excess of the provisions of the law. Yes Chapter I.8 Report and consolidated accounts

8 CMVM RECOMMENDATION COMPLIANCE REPORT I.5 Minutes and disclosure of resolutions passed I.5.1 The minutes of general shareholder meetings shall be made available to shareholders on the company s website within 5 days, even though not inside information under the law; also, a historical background of attendance lists, agendas and resolutions at general meetings held for, at least, the three previous years should be kept on this website. Yes Chapter I.13 & I.14 I.6 Measures for corporate control I.6.1 Measures adopted to prevent the success of takeover bids shall respect the interests of the company and of its shareholders. - (2) I.6.2 Corporate bylaws that provide, in observance of the above principle, for a limitation to the number of votes that may be held or exercised by a single shareholder, individually or in agreement with other shareholders, shall also establish that, at least every five years, the maintenance of such bylaw provision shall be subject to a resolution at the General Shareholder Meeting with no requirements for an aggravated quorum as compared to the legal one and that upon such resolution all votes cast shall be counted without the operation of such limitation. No (2) I.6.3 Defensive measures the effect of which is to automatically cause a serious erosion in the company s assets in the case of change of control or of change in the composition of the management body, thus hindering the shares free transferability and shareholders free evaluation of the performance of members of the management body, shall not be adopted. II. MANAGEMENT AND SUPERVISORY BODIES Yes Chapter I.20 II.1 General II.1.1 Structure and duties II The management body shall assess on its corporate governance report the adopted model, by identifying any constraints on its operation and proposing action measures as are, in its opinion, creditworthy to overcome such constraints. II Companies shall create internal control systems for an efficient tracking down of risks related to the corporate business, to safeguard their assets, and to the benefit of transparency in their corporate governance. II Management and supervisory bodies shall be provided with internal regulations and shall have them disclosed on the company s website. Yes Yes Yes Introduction, Corporate Governance Chapter II.5 Chapter II.7 Report and consolidated accounts

9 CMVM RECOMMENDATION COMPLIANCE REPORT II.1.2 Incompatibilities and independence II The board of directors shall include a sufficient number of non-executive directors whose role is to ensure an actual ability to audit, supervise and assess the activity of its executive members. II The non-executive members of the management body shall include a number of independent members as appropriate, taking into account the size of the company and its shareholder structure, which shall in no case be less than a quarter of the total number of directors. II.1.3 Eligibility and appointment II The chairman of the audit committee shall be independent, and be qualified as appropriate for his duties. II.1.4 Policy on the report of irregularities II The company shall adopt a policy on the report of irregularities allegedly occurred within it, with the following data: (i) indication of the means that can be used for internal reporting of irregular practices, including the persons with legitimacy to receive such communications; (ii) indication of the treatment to be given to any such communications, including confidential treatment where the communicator so wishes. II Such policy s general guidelines shall be disclosed in the company s corporate governance report. II.1.5 Remuneration II The remuneration of the members of the management body shall be structured in such a way as to allow the alignment of their interests with the company s interests. Within this framework: (i) the remuneration of directors exercising executive duties shall incorporate a performance-based component, and for such reason it shall take into consideration a performance evaluation carried out, on a regular basis, by the competent body or committee; (ii) the variable component shall be consistent with the maximization of the long-term performance of the company, and dependent on the sustainability of the adopted performance variables; (iii) unless the law so directly imposes, the remuneration of non-executive members of the management body shall be exclusively composed of a fixed sum. Yes Yes Yes Yes Yes Yes Chapter II.1, Board of Directors Chapter II.14 Chapter II.14, Audit Committee Chapter II.35 Chapter II.35 Chapters II.31, II.32, II.33 & II.34 Report and consolidated accounts

10 CMVM RECOMMENDATION COMPLIANCE REPORT II The compensation committee and the management body shall submit to appraisal by the annual general shareholder meeting a statement on the remuneration policy for the management and supervisory bodies and for all other officers (in the meaning of article 248B-3 of the Securities Code), respectively. Within this framework, shareholders shall be informed, inter alia, of the criteria and main parameters proposed for the performance evaluation in order to determine the variable component, whether such component consists of share prizes or share call options or annual bonuses or otherwise. Yes Chapters II.29 & II.30 II At least one representative of the compensation committee shall be present at the annual general shareholder meetings. Yes Chapter I.15 II A proposal shall be submitted to the General Meeting on the approval of plans for the allotment of shares and/or share call options or based on share price variations to members of the management, supervisory bodies and other officers (in the meaning of article 248B-3 of the Securities Code ( ). II The remuneration of the members of the management and supervisory bodies shall be subject to individual annual disclosure broken down, as the case may be, into the various components received in terms of fixed remuneration and variable remuneration, as well as remuneration received in other companies of the group or companies controlled by holders of qualified shareholdings. II.2 Board of Directors Not applicable Yes (3) Chapter II.31 Chapters II.31 & II.33, n) II.2.1 Within the limits established by law for each management and supervisory structure, and other than by reason of the reduced size of the company, the board of directors shall delegate the management in the normal course of the company, and any delegated responsibilities shall be identified on the annual report on Corporate Governance. Yes Chapter II.3, Executive Committee II.2.2 The board of directors shall ensure that any company action is consistent with its goals, and shall not delegate its responsibility, notably, as regards: (i) the definition of the company s strategy and general policies; (ii) the definition of the corporate structure of the group; (iii) any decisions as should be considered strategic decisions due to their amount, risk or special characteristics. II.2.3 In case the chairman of the board of directors carries out executive duties, the board of directors shall (...) Yes Not applicable Chapter II.3, Executive Committee Chapter II.1, Board of Directors and Chapter II.8 Report and consolidated accounts

11 CMVM RECOMMENDATION COMPLIANCE REPORT II.2.4 The annual management report shall include a description of the activity carried out by non-executive directors, and mention, inter alia, any constraints faced. Yes Chapter II.17 II.2.5. The management body shall promote a rotation of the member responsible for the financial function, at expiration of each two terms of office at least. 3 II.3 Executive Committee Not applicable Chapters I., Board of Directors, & II.11 II.3.1 Directors exercising executive duties, where requested by other corporate body members, shall provide, in a timely manner and as appropriate for any such request, any information as so requested. Yes Chapter II.3, Disclosure obligations of the Executive Committee II.3.2 The chief executive officer shall send all notices and minutes of such committee s meetings to the chairman of the board of directors and to the chairman of the audit committee. Yes Chapter II.13 II.3.3 The chairman of the executive board of directors shall send to the chairman of the general and supervisory board ( ). Not applicable II.4 Audit Committee II.4.1 The general and supervisory board ( ). Not applicable II.4.2 Annual reports on the business carried out by the audit committee shall be subject to disclosure on the company s website, together with the financial statements. Yes Chapter II.4 II.4.3 Annual reports on the business carried out by the audit committee shall include a description of its supervisory activity, and mention, inter alia, any constraints faced. Yes Report available on PT s website, Chapter II.4 II.4.4 The audit committee shall represent the company, for all intents and purposes, vis-à-vis the external auditor, it being the committee s responsibility, inter alia, to propose the provider of such services and such provider s remuneration, to take charge of ensuring, within the company, conditions as appropriate for such service provision, as well as being the company s interlocutor and primary addressee of the relevant reports. II.4.5 The audit committee shall evaluate the external auditor each year and propose the removal of the same to the general shareholder meeting where cause therefor occurs. Yes Yes Chapter III.17 Chapters II.24 & III.17 3 The member of the Company s management body responsible for the financial function is serving his second term of office. Report and consolidated accounts

12 CMVM RECOMMENDATION COMPLIANCE REPORT II. 5 Special committees II.5.1 Other than by reason of the reduced size of the company, the board of directors and the general and supervisory board, according to the adopted model, shall create any committees as required to: (i) ensure a competent and independent performance evaluation of the executive directors and of their own overall performance evaluation, as well as of the various existing committees; (ii) ponder on the adopted governance system, check its efficiency and propose to the competent bodies any action as required to improve it. Yes Chapter II.2, Evaluation Committee & Corporate Governance Committee II.5.2 The members of the compensation or similar committee shall be independent from the members of the management body. II.5.3 All committees shall draw up minutes of the meetings held. III. INFORMATION AND AUDIT Yes Yes Section IV Independence of the Members of the Compensation Committee Chapter II.37 III.1 General disclosure obligations III.1.2 Companies shall ensure the existence of a permanent contact with the market, in observance of the principle of equality of all shareholders and preventing any asymmetries in the access to information by investors. For such purpose, the company shall keep an investor support office. III.1.3 The following information, to be available on the company s website, shall be disclosed in English: a) The name of the company, that it is a public company, its registered office and all other data mentioned under article 171 of the Companies Code; b) The bylaws; c) Identification of all members of the corporate bodies and the representative for market relations; d) Investor Support Office, its duties and means of access; e) Financial statements; f) Six-month agenda of corporate events; g) Proposals submitted to discussion and voting at the general shareholder meeting; h) Notices for general shareholder meetings. Yes Yes Chapter III.16 Chapter III.16 Report and consolidated accounts

13 (1) CMVM 2007 Recommendation I.3.3 on the one share, one vote principle The principle according to which each share corresponds to one vote is not established in other jurisdictions or reference markets, and in fact, at the end of 2007, the European Union has stopped any efforts regarding its adoption (either by means of a directive or through mere recommendation). In particular, the issue concerning proportionality between ownership and control of the shares held in listed companies has been widely discussed in the European Union, and several studies were produced and concluded that it is not possible to establish a clear causal connection between deviations from proportionality and the financial performance or corporate governance of a listed company. It should even be noted that the revision of the CMVM Recommendations on the Governance of Listed Companies, following the publication of the CMVM 2010 Recommendations, caused this principle to be reconsidered since it is no longer categorically recommended that each share must correspond to one vote. This reveals that the regulator itself eventually acknowledged that such principle is not indisputable, and may even generate inefficiencies. Consistently with its understanding along these past years, PT deems that, as this principle is not universally accepted and it has been lessened by the new CMVM 2010 Recommendations, it is justifiable not to comply with CMVM 2007 Recommendation no In addition, through the bylaws provision establishing that a minimum of 500 shares is required in order to exercise one voting right, the Company seeks to establish conditions in order to allow the General Shareholder Meeting to be carried out efficiently, permitting an actual participation of shareholders that meet that minimum share level. This provision is not intended to create a defensive measure or a control enhancing mechanism. (2) CMVM 2007 Recommendations n. os I.6.1 and I.6.2 on defensive measures against take-overs and limitations to voting right exercise In spite of the existence, as a result of the Company s privatisation procedure, of class A shares in PT s share capital that grant special rights to the Portuguese State as the holder of such shares, it is PT s understanding that its Bylaws do not contain any defensive clauses contrary to the interests of the Company and its shareholders. It should also be mentioned that PT s bylaws contain a limitation on the counting of the votes of a single shareholder, whereby the votes cast by a single shareholder of ordinary shares, directly or through a representative, in his own name or as a representative of another shareholder, that exceed 10% of the total share capital, shall not be counted (article 13). The Bylaws do not establish that this bylaw provision must be subject, every five years, to evaluation by the General Meeting of Shareholders in order to resolve on its maintenance or not. Therefore, PT does not adopt CMVM 2007 Recommendation no. I.6.2. In truth, this provision, which intrinsically reflects and historically appeared in several European countries a measure of expansion of shareholder democracy (by reducing the voting power of major shareholders and correspondingly expanding the voting power of minorities), is also normally understood to possibly interfere with the success of takeover bids. However, notwithstanding the possible effect of reduction in the number of takeovers (as higher levels of shareholder participation are required to obtain control), such measure is also deemed as an incentive to the existence of more attractive conditions of takeover bids, since only higher levels of acceptance by the addressees of such takeover bids allow the attainment of control thresholds. Report and consolidated accounts

14 Furthermore, within the context of the tender offer (OPA) to which PT was subject during the 2006 financial year, the abovementioned provision of the Bylaws (see reference to article 13 of the Bylaws above) was particularly visible. In fact, under the terms and conditions of the general tender offer over the shares representing PT s share capital, which preliminary announcement was published on 6 February 2006 by the companies Sonaecom, SGPS, SA and Sonaecom, BV, the removal of the said voting restriction was a condition to which the tender offer was subject. However, at the General Meeting of Shareholders called for 2 March 2007 to vote for the said removal, even though exclusively within the context of the abovementioned tender offer, the proposal was rejected by a majority of votes cast and without the opposition of the class A shares. Therefore, the situation remained unchanged, based on the conviction that limitations as provided for under the Bylaws contribute to share capital dissemination and a greater transparency in the Company s corporate governance. In this way, it is PT s understanding that the measures adopted (or which effect may be) to prevent the success of tender offers respect the interests of the Company and of its shareholders, and they correspond to their will, as expressed at the abovementioned General Meeting of Shareholders of 2 March (3) CMVM 2007 Recommendation no. II on the disclosure of the remuneration of the members of the management and supervisory bodies Especially considering all the legislative modifications occurred in 2009 in the matter of disclosure of the remunerations of the members of the management and supervisory bodies of listed companies (in particular, Law no. 28/2009 of 19 June 2009), PT will disclose the annual remuneration earned by the members of its management and supervisory bodies, in aggregate and individual terms. To that extent, PT will comply with CMVM 2007 Recommendation no. II In addition, it is deemed relevant to inform the Shareholders that the members of the Company s management and supervisory bodies performing duties in other management bodies of the group earn no remuneration other than the one referred to herein. As regards the remuneration of the members of the management and supervisory bodies in companies controlled by shareholders of qualified holdings, PT believes, in an actualistic interpretation of this Recommendation, that PT is in compliance with the same. In other words, taking into account the wording of the CMVM 2010 Recommendations, PT has no reason to consider that PT is in breach of the best practices supported by the CMVM in this field. Moreover, as mentioned on PT s governance report for last year, the information in question does not seem relevant for the shareholders to become aware of the agency costs incurred by the Company. Report and consolidated accounts

15 INTRODUCTION PT STRUCTURE PT is a global telecommunications operator, the leader at national level in all its operation sectors, and offers, on a global integrated basis, its services, products and solutions to a universe in excess of 70 million customers. PT claims its position as the Portuguese corporation with the largest national and international projection, with a presence in the European, American, Asian and African continents. It has a diversified business portfolio, where quality and innovation are the determining factors, at the level of state-of-the-art of international companies in its sector. The highlight at international level is PT s operation in the Brazilian market, where the company is currently the largest Portuguese investor. PT holds a 50% stake in Brasilcel (the holder of 59.42% in VIVO), the largest mobile operator in South America and the fourth largest mobile telecommunications service company in the world. PT is structured in organization units: Wireline Business in Portugal, Mobile Business in Portugal, International Business and Instrumental Companies. Such units are coordinated by the holding company, led by its Executive Committee with the support of the corporate centre. Subsidiaries report functionally, not hierarchically, thus ensuring an effective articulation. Portugal Telecom Domestic Business Wireline Business Mobile Business 100% PT Comunicações 100% PT Prime 100% TMN International Business 50% Brasilcel, the holder of 59.42% in Vivo 25% Unitel(1) 100% Dedic 40% Cabo Verde Telecom(1) 34% MTC(1) 51% CST(1) 41.12% Timor Telecom 28% CTM 29% UOL inc Instrumental Companies 100% PT Sistemas de Informação 100% PT Inovação 100% PT PRO 100% PT Compras 100% PT Contact (1) Shares held by Africatel, which is 75% controlled by PT. Report and consolidated accounts

16 CORPORATE GOVERNANCE PT follows an Anglo-Saxon governance model, which is based on the existence of a Board of Directors, an Audit Committee composed of non-executive directors specifically appointed by the General Meeting of Shareholders and a Chartered Accountant ( ROC ) elected by the General Meeting of Shareholders upon a proposal by the Audit Committee. Portugal Telecom s organization structure further includes a Compensation Committee elected by the General Meeting of Shareholders, which is responsible for determining the remunerations of the members of the corporate bodies. The members of the corporate bodies and of the Board of the General Meeting of Shareholders are elected for a three-year term of office, and they may be re-elected once or more times within the limits of the law. PT s governance model may be schematized as follows: General Meeting of Shareholders Compensation Committee Board of Directors Evaluation Committee Corporate Governance Committee Executive Committee Audit Committee ROC Sustainability Committee Secretary General and Company s Secretary (Effective and Alternate) Disclosure Committee Consultive Council General Secretariat Human Resources Internal Audit Corporate Communicati on Unit Corporate Taxation Unit Planning, Controlling and Corporate Finance Competition Investor Relations Treasury Financial Reporting Report and consolidated accounts

17 The values of efficiency, simplicity, transparency and accuracy are the basic pillars of this governance model providing PT with a structure as appropriate for the specificities and needs of the company. This model has also been welcomed by the market. Within this context, PT s governance includes an Executive Committee with powers delegated by the Board of Directors, which acts on a predominantly operational basis, while the Board of Directors is entrusted with the supervision of corporate activities, with the support of a Corporate Governance Committee and an Evaluation Committee created in October 2008, each such internal committee acting within the scope of its respective specific powers delegated by the management body. This supervision task is further reinforced by the action of the non-executive independent members of the Board of Directors. A Consultive Council, a Disclosure Committee and a Sustainability Committee, as well as several operational departments that guarantee an effective and transparent management of the Company complete the Executive Committee s supporting structures. The Audit Committee, together with the Chartered Accountant, perform the supervision functions set forth in the applicable laws and regulations. In particular, the Audit Committee is responsible for representing the Company in its relations with the external auditors and for monitoring PT s internal control and risk management system. PT General Meeting of Shareholders resolves on matters as specially assigned by law or the Company s Bylaws, as well as on matters not comprised within the responsibilities of other corporate bodies. In this way, considering the full implementation and consolidation of the governance model adopted by the General Meeting of Shareholders of 22 June 2007, for purposes of compliance with the CMVM Recommendation II.1.1.1, and based on the outcome of the Corporate Governance Committee s resolution pursuant to Recommendation II.5.1. part ii), PT considers that this governance model has ensured an effective performance of the duties of its corporate bodies and their articulation, and has proven appropriate to the specificities of the Company. There have been no constraints to its operation and no circumstance that might impair the regular functioning of the adopted checks and balances system has occurred as to justify any change to PT s organization structure or governance practices. In fact, and as concluded within the follow up of this governance model made by the Corporate Governance Committee, such model has proven to be appropriate to catalyse national and international corporate governance best practices and to contribute to the transparency and accountability of the Company and its management vis-à-vis its shareholders, investors and the market. Report and consolidated accounts

18 CHAPTER I. GENERAL MEETING OF SHAREHOLDERS The General Meeting of Shareholders, composed of shareholders with the right to vote, ordinarily meets once a year or whenever its call is requested to the Chairman of Board of the General Meeting of Shareholders by the Board of Directors, the Audit Committee or shareholders representing at least 5% of the share capital. The meetings are held at the registered office or other location as chosen by the Chairman of the Board pursuant to the law. They cannot take place by remote-access telematic means. The General Meeting of Shareholders is called and conducted by the Chairman of its Board or, in his absence or impossibility to conduct the works, by the Vice- Chairman. Shareholders may participate directly in the General Meeting or appoint their representatives, within the broadest terms provided for under the Portuguese Companies Code. A duly signed letter addressed to the Chairman of the Board of the General Meeting of Shareholders is a sufficient instrument of representation. For such purpose, shareholders may access the representation letter form made available on the website in accordance with information disclosed by the Company in the relevant General Meeting notice, in compliance with article 23 of the Portuguese Securities Code. In carrying out their duties, notably in the preparation, call and conduction of General Meetings of Shareholders, as well as in replying to queries raised or requests submitted by the shareholders, the Chairman of the Board of the General Meeting of Shareholders, in addition to being assisted by the Vice-Chairman and the Secretary of the Board of the General Meeting of Shareholders, has the support of the services of the Company s General Secretariat, which is provided with human and technical resources as required for the General Meeting to be appropriately held, taking into account, inter alia, the number of participants and the agenda of each meeting. The Chairman of the Board of the General Meeting of Shareholders is also provided with logistic support as required to carry out his duties, and the shareholders may contact the Board of the General Meeting of Shareholders as follows: Chairman of the Board of the General Meeting of Shareholders Post Address: Avenida Fontes Pereira de Melo, n.º º piso, Lisboa Telephone: Fax: assembleia-ptsgps@telecom.pt The members of the Board of the General Meeting of Shareholders comply with the independence requirements of article and incompatibility rules of article 414A-1, both of the Portuguese Companies Code, applicable by virtue of the provisions of article 374A of that same Code. I.1. IDENTIFICATION OF THE MEMBERS OF THE BOARD OF THE GENERAL MEETING OF SHAREHOLDERS Board of the General Meeting of Shareholders António Menezes Cordeiro Chairman Eduardo Vera-Cruz Pinto Vice-Chairman Francisco Leal Barona Secretary Report and consolidated accounts

19 I.2. MEMBERS OF THE BOARD OF THE GENERAL MEETING OF SHAREHOLDERS COMMENCEMENT AND EXPIRATION OF TERMS OF OFFICE The members of the Board of the General Meeting of Shareholders were elected on 27 March 2009 for the three-year term of office. I.3. INDICATION OF THE REMUNERATION OF THE CHAIRMAN OF THE BOARD OF THE GENERAL MEETING OF SHAREHOLDERS By determination of the Compensation Committee approved during the 2008 financial year, the yearly remuneration of the Chairman of the Board of the General Meeting corresponds to 42,000 Euros. I.4. INDICATION OF BLOCKING PERIOD REQUIRED FOR PARTICIPATION IN THE GENERAL MEETING OF SHAREHOLDERS For confirmation of entitlement to voting rights, the Bylaws require that shareholders provide evidence of registration of their shares in a book-entry securities account no later than 5 business days prior to the relevant meeting, and such shares should remain inscribed in the name of the shareholder at least until the General Meeting is closed. With this blocking period the Company adopts CMVM 2007 Recommendation no. I.2.1. I.5. INDICATION OF RULES APPLICABLE TO SHARE BLOCKING IN THE EVENT OF ADJOURNMENT OF THE GENERAL MEETING OF SHAREHOLDERS Following an amendment to paragraph 4 of article 13 of the Bylaws approved by resolution of the Annual General Shareholder Meeting of the Company held on 27 March 2009, and consistently with the past practice of the Company, it was expressly provided for that share blocking may be released in the event of adjournment of the General Meeting, with such blocking being made once again a mere 5 business days in advance of the date on which the meeting is resumed. In this way, PT adopts a CMVM 2007 Recommendation no. I.2.2. I.6. NUMBER OF SHARES CORRESPONDING TO ONE VOTE Under the Company s Bylaws, each 500 shares grant the right to one vote. Shareholders holding a lesser number of shares may group together and be represented by one of the group members, so as to jointly accumulate the number of shares necessary to exercise the right to vote. Only shareholders entitled to vote may attend a General Meeting of Shareholders. Within the framework of American Depository Receipts (ADR) or Global Depository Receipts (GDR) programmes having as their object Company shares, the holders of ADR or GDR are deemed to be the shareholders, while the entity in whose name the shares are registered is deemed a simple representative of the shareholders, provided however that such shareholders comply with the conditions set forth in the Bylaws for the exercise of such right. These conditions are communicated to the holders of the right to vote in each notice for the General Meeting of Shareholders. I.7. LIMITATIONS ON VOTING RIGHT EXERCISE OR VOTE COUNTING Report and consolidated accounts

20 In addition to chapter I.6. above, and according to article 13 of the Company s Bylaws, the votes cast by a single holder of ordinary shares, directly or through a representative, in his own name or as a representative of another shareholder, that exceed 10% of the total voting rights corresponding to the share capital shall not be counted. Shares held by a person in situations as provided for under article 20 of the Portuguese Securities Code shall be deemed to belong to the shareholder, and the limitation on the counting of votes cast by each person affected by the said provision shall be proportional to the number of votes held and cast. There are no shares not granting voting rights. I.8. BYLAW RULES ON THE EXERCISE OF VOTING RIGHTS Under article 14 of the Company s Bylaws, the General Meeting of Shareholders resolves, on a first or subsequent call, by a majority of votes cast, without prejudice to any qualified majority as required in cases as provided for by law. In this way, the constitutive and resolutive quorum of the General Shareholder Meeting established under PT s Bylaws is no different from that established under the Portuguese Companies Code. The rules applicable to resolutions on any amendment to the bylaws are described in Chapter III.6., and the resolutions whereby special rights pertaining to class A shares should be taken into account are identified in Chapter III.1. PT s Bylaws do not provide for any separate system for rights with a property content. I.9. EXISTENCE OF BYLAW RULES ON THE EXERCISE OF VOTING RIGHTS BY CORRESPONDENCE The Company Bylaws provide that the voting by correspondence may encompass all matters contained in the notice, under the terms and conditions set forth therein, and votes cast in this way shall be considered at the time of the counting by adding the same to the voting rights exercised in the course of the General Meeting. The Bylaws further provide that the terms and conditions for voting by correspondence shall be defined by the Chairman of the Board of the General Meeting of Shareholders on the notice, in order to ensure their authenticity, regularity, security, reliability and confidentiality up to voting. Vote authenticity shall be ensured before the Chairman of the Board of the General Meeting of Shareholders by means of a communication with a legally acknowledged signature, in the case of corporations, or, in the case of individuals, with a simple signature together with a photocopy of the relevant identity card. In order to guarantee vote confidentiality, the said communication shall be sent in a closed envelope that will only be considered at the time of vote counting. Additionally, the Bylaws provide that votes cast by correspondence are deemed as negative votes as to any resolution proposals submitted after such votes were cast. The presence at a General Meeting of a shareholder who had exercised his voting rights by correspondence, or of his representative, determines the revocation of the vote so cast. I.10. MAKING AVAILABLE A FORM FOR THE EXERCISE OF VOTING RIGHTS BY CORRESPONDENCE According to PT s practice, the procedure for voting by correspondence shall be as follows: > Shareholders entitled to vote may, according to article 22 of the Portuguese Securities Code, Report and consolidated accounts